Wall Street stumbles after Fitch downgrades US’ AAA credit rating
Wall Street tumbled on Wednesday after ratings agency Fitch’s shocking downgrade of the US’ top-tier sovereign credit.
The Dow plunged 348.16 points, or 1%, to 35,282.52. The tech-heavy Nasdaq had its worst day since February, dropping 310 points, or 2.2%. The S&P 500 slid 1.4%, its biggest decline since April.
Fitch cut the US from AAA to AA+ after the market closed Tuesday, citing the nation’s ballooning debt load and political dysfunction in Washington.
The downgrade “basically tells you the US government’s spending is a problem. It’s an unsustainable budget situation because the economy can’t even grow its way out of this problem going forward,” said Steven Ricchiuto, US chief economist at Mizuho Securities.
“Therefore, they’re going to have to either tackle it or accept the consequences of potential further additional downgrades.”
Tony Sycamore, an analyst with IG, said that apart from the Fitch move, there had been some disappointing data in the US and China, and some weaker-than-expected earnings, so people were taking money off the table.
JPMorgan CEO Jamie Dimon said the US should get rid of the debt ceiling, in a CNBC interview on Wednesday.
But Dimon said the downgrade “doesn’t really matter that much” as the markets decide it and not the rating agencies.
Fitch’s downgrade came two months after President Biden and the Republican-controlled House reached a debt ceiling agreement after months of political brinkmanship.
The deal lifted the government’s $31.4 trillion debt ceiling.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.
The move, which came after Fitch had placed the ratings on negative watch in May, drew an angry response from the White House, calling it “arbitrary and based on outdated data” as it came two months after a debt ceiling agreement that averted a US default.
“Fitch’s decision does not change what Americans, investors and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong,” Treasury Secretary Janet Yellen said.
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets.
It’s the first time the US has had its AAA rating cut since 2011, when Standard & Poor’s cut it one notch to AA-plus following another debt ceiling battle.
Aside from political battles in Washington, Fitch pointed to the rising general government deficit, which it anticipated will rise to 6.3% of gross domestic product in 2023, from 3.7% in 2022, for its decision.
The agency also noted that it expects the US economy to slip into a mild recession from the fourth quarter of this year into the first quarter of 2024.
“Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the US economy into a mild recession,” Fitch said in the statement.
The view contradicts the opinion offered by the Fed after central bankers hiked interest rates to a 22-year high.
Fed Chairman Jerome Powell said that Fed staff is no longer forecasting a recession.
“We do have a shot” for inflation to return to target without high levels of job losses, Fed Chairman Jerome Powell said.
With Post wires
